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[00:00:00] Colin Keeley: hello and welcome back. This is Colin Keeley here.

[00:00:02] Brent Sanders: And I'm Brent Sanders.

[00:00:04] Colin Keeley: And we are two guys buying and building wonderful internet companies.

[00:00:08] Brent Sanders: Yeah. And, we haven't recorded, an episode in. So, welcome back. If you basically took the summer off of podcasting and, wanted to share a recent story or recent sort of happening, about some acquisitions that we're doing one in particular that, we call what a venture orphan.

And, why don't you, you explain just a quick rundown. What do we, what do we consider a venture orphan? Yeah. I mean,

[00:00:32] Colin Keeley: Startup that raised venture capital. And didn't achieve, , the triple digit growth rates that they were hoping for. So often they're, good businesses on paper, more often than not overly bloated teams because they were trying to reach that, , triple, triple, double or whatever you need to be the next Uber.

but talking to these folks, , they raised a bunch of money often going out of business or just not on the right trajectory to raise the next round of capital. I, I can give some backstory on this specific one. We're going to tell as many details as we can, but keep it anonymized. So this particular business was a managed marketplace, so not like pure software.

example of this is a business that we worked with in the past, it's called Paro. So they'll match you with like a finance professional, a bookkeeper, a CPA, a CFO, and they'll take like half the money basically, or in that ballpark. So recurring revenue, but it's not, 90 percent gross margins. and so this business, it's roughly 50%, Paro was something similar.

and it was. GMV. So top line is like 3 million ish, and then they take roughly half of that in net revenue. So 1. 5 or in that ballpark, and they were losing a 50 to a hundred thousand a month was kind of their situation. We didn't get their exact financials is always murky, which is how they ended up in the position they did.

and then more background on them. They raised a few million in equity, some venture debt. the founders, there are two of them, I'll just call them Jack and Jill, just to like, so we have names to refer to. Jack was in charge of the demand side, so the sales. he personally guaranteed around 300, 000 in debt, and Jill was in charge of product and supply, so the other side of the business.

And then, how it came to us, because sourcing these things is always kind of funky, minority investor was back in them. And wanted to do a new deal with us because they were going out of business and had a deal on the table. And we are also friends with the majority investor who put in, a million or so in equity.

Anything you want to add to the

[00:02:26] Brent Sanders: background here? No, no. I think that's right. I mean, so this company was racing out of business. They, I guess they had a deal on the table. We got kind of looped in a little bit too late. I guess that that's one, maybe not too late, but one reflection is that every day the business, the situation got worse.

And so had we known about it two weeks earlier, maybe we, we could have gotten it done. Maybe not even still. So, but we really value the referral there and it was like, okay, I'm Their situation from the people that put equity in is they were going to zero. So there was an offer on the table for aqua hire.

They're going to bring over the team. All the debt and equity was just basically gonna get written down, which is, that's normal. That's part of the venture game.

[00:03:10] Colin Keeley: just one clarification there. The personally guaranteed debt was going to get paid back. And the venture debt was also going to get paid back with the offer on the table.

The equity, the shareholders are going to zero, which included like friends and family. And like, your best friend's mom put money in and they were getting nothing. Yeah.

[00:03:29] Brent Sanders: Yeah. And so, the founders, we had an initial meeting with them. So we first met with the equity holders and they're like. this sucks, number one, and we're fine writing it down.

If, if that's what it's going to be, it's what it can be. But we don't really agree with the founders that like, this isn't a great business. It's a great business. And they've, they aren't achieving the growth that they want. And they want to keep funding that growth. And they, the acquire is making it sound like they will keep funding that growth, but they're losing 50 to a hundred K a month.

So it's like, if you're not achieving that growth trajectory, you got to make some changes. And so this is, we've been a part of a couple of these where, it's, It's like, you want to wipe the slate clean, the, the, the current plans that working, how do you put this on a sustainable path?

So we got on a call with the, one of the founders and one of the things we said, like, very upfront being like, Hey, we know you have a deal on the table. You have, he had his personal finances tied up with this. Again, there's this personal guaranteed debt that he had, but like, we really don't want to fuck this up for you.

That was like what, even what our intro from the people that referred to us were like, Hey. We don't want to screw this up. We really don't want to make sure, want to make sure that he gets taken care of, but we also want to retain our equity. And so we're going to zero. So, he stated kind of in the early stages, like, we feel terrible about this.

We want to, that's our number one priority is giving our shareholders some value. these, as you said, family and friends were involved. These investors have been, working with us for a long time. and so we were, we're kind of looking at this as. And opportunity to, to provide a better alternative, right?

And so the alternative we provided, we kind of put something quickly together. It was going to still wipe out his personal debt, but bring the company to like a sane, but profitable, run rate, right? Like just correct, forget about some of the pie in the sky startup ideas for a little bit, but, and just focus on the core business and make that run well and, and be profitable.

And, I feel like that went well in the first meeting and then. I don't know. Any reflections from our first sort of like introduction to the business?

[00:05:34] Colin Keeley: so you alluded to it. We were brought in pretty late. They had this other offer that they had been working on and like somewhat finalizing for weeks.

And we were brought in to be like, Hey, this is closing fast. Can you guys move fast? So we just. I was out, I think I had like a rural wedding, like rural Colorado. So we hopped on a meeting almost every day with the founders and,equity backers and the debt holders and like all the different kind of shareholders involved and try to learn the business as quickly as possible.

and kind of the problem there was that the way they ended up in this situation was they weren't great at finances. And so we didn't really have a great sense. You have these obligations to the supply side that you have to pay every month. It seemed like no one really knew kind of what was owed every month.

So, for us to have a deal make sense, we basically have to model out the financials under our ownership for the next few months in the future state. And it was hard to rebuild that P& L without like proper information, which seemingly no one knew. but yeah, yeah. I mean, otherwise, I think your intention was to fly out and your flight got canceled. So like we try to get in person as much as we can. What's the

[00:06:42] Brent Sanders: thought there? Yeah, I forgot about that. Yeah. I thought that would be, that's always served me well I wanted to fly out to their location as soon as possible.

and I. Try doing that. But like I canceled day of, I was like, okay. So we ended up doing a zoom call for like two, two, three hours with one of the partners. And,I, I got to see kind of where they were at and more on the product side and the operation side and like what they're actually doing and, running through the business and it was pretty clear that it was, it was bloated.

It was, there was a lot of like, they had set up all these jobs for, for growth. Everyone was, making six figure plus salaries. it was. just, just not fitting kind of what they were actually doing revenue wise. So we did, I hate to sound like, pure private equity, but we just saw a great opportunity to like, Hey, you can, you can do all this stuff with different types of labor.

You can do this stuff. You don't have to do all the things that you're necessarily doing, because a lot of the things they were trying to do was like, we're really trying to get people on our tech platform, which we saw with other marketplaces. It's like. They don't really want that. Like they want to hire these people or they want to connect with this other party and you're connecting them, get out of the way, make it easy to pay them.

And sure. If you're going to add value, but they were like, we really need re engagement in our platform. And there was no value being derived from that. At least as of yet, the theory was if we get people on this platform, they'll see how easy and much value they're getting. And it's like, maybe, but you're spending so much money for that.

So the. General consensus between the equity holders and us after this call. Yeah, you don't really need all this infrastructure around it. It's not adding value to the end user. It's adding like other parts. So what we would propose doing is building a sales organization to just build up the, the top of funnel.

You just need the , demand side. . We have plenty of supply and that, and that's kept well. You just need, I mean all of these are, are demand constrained. It's never really the supply and so. We've seen that firsthand. We've seen how to do that. We've been around those environments.

We felt confident that we could push on that and put the product on hold and just keep it running to keep the business afloat. So, we put together after, a couple of, back before we put an informal offer together and, and managed to offend them, managed to say, Hey, one of you will step away. I think we got off on a wrong foot, but I think it was, it was.

Bound to happen. Like somebody needed to step away. There were two founders, they're making six figure salaries. There didn't need to be both of them. But I think the feedback to us was like, well, we would have liked to have been asked, which is the contrast to, I think what we were getting feedback is like, we want number one priority is.

We want our shareholders to get paid back. And the number two is like, we would like to see this business continue on and grow again. And so we, we framed it that way, like in order to achieve this, get back on the correct rail, we need to make some cuts and you need to, lean the business back into a profitable position, and then we'll dig back into trying to grow it the way you're saying through the product versus the way we think it would work better, which was sales.

So, and mind you, like we said this over and over. We don't know anything about running their business. They've been running for four or five years or so. And so we kept prefacing like, Hey, this is a theory, but we're willing to do this and we're willing to, put a lot of effort into this. So, and, and capital.

So it was like an alternative that we raised. and we, we essentially sent our first offer over and they were kind of like, what is this? And we're not interested in this because for the exact opposite reason, it was essentially like, We're not getting the paydays anymore. And our HR equity holders are getting something now, but now we're, our team has to get cut and, one of us would have been like to have been asked about it.

So it very clearly was like, not any people's self interest start getting involved when they realize, Oh, if it means paying back my equity holders. And I'm not going to get the same deal then, everyone has to look out for themselves, I suppose. But it was, it was, I think you knew that was going to happen.

I was kind of like, well, they, they said they, they didn't care as much about, their compensation, but they did. And it was natural. Like, it's fine. We still were going to pay off all of their personally guaranteed debt. That was part of our structure. It was like, Hey, you're going to walk away scot free because your existing deal may not go through.

But, yeah, so I guess I should have preface all of this that the deal didn't happen. I think that's should be understood if we're talking about this, we either close it or we didn't and we didn't. yeah,

[00:11:18] Colin Keeley: I guess just at a high level. So our offer was one founder stays the one in charge of demand.

One founder transitions out. Both of them get cash incentives. So like bribes for successful transitions and equity in the new, new co . we cram down existing investors, but they keep a good portion. We bring in more money and then we reorient the company around growth and pay off the debt.

so make the debt holders happy, pay off the personally guaranteed stuff. And I thought we had sufficient bribes to keep the founders happy because what they were doing is. Basically selling off an asset that they didn't really own anymore and trading that for, effectively market jobs.

I wouldn't say like the bonuses they're receiving were widely outside the norm of what they could get just in the open market. , they're, credible individuals that have a lot of experience and could get good jobs. so yeah, we delivered it maybe poorly. I think we were somewhat misguided, in like how involved one founder was.

Another, but we also probably had to pull out a band aid. Yeah, we had no idea. I don't know, like, were we overly transparent like, Hey, this is our plan. it doesn't make sense to pay all these, head of sales people that aren't managing anyone. These huge cushy salaries. when your business is losing, a significant amount of money every month.

I think the other acquirer will probably do something very similar, but they weren't openly, talking about that before the transition closed. So pissed off and founder overly transparent. I don't know. I like, what do you

[00:12:49] Brent Sanders: think? Yeah. So let's fast forward to the end. So obviously it didn't happen.

We, I think it got weird essentially. This was the takeaway. And the reason I think, so as I said in the beginning, every day it got worse every day, Uglier the business, they had more uncertainty and likely more debt than they needed. They needed to pay, they were receiving payments and they need to pay their, supply.

And they didn't know it. They were like, well, look at last year. And well, last year was 96, 000. So you think that's going to be what it is? And so we kept running this calculus. It's just every single day got worse and worse and murkier and murkier. And, so yeah, the, the last call that we had with the founder, he was kind of, exasperated that we weren't, so here's the other weird thing.

And this is a red flag for others that are listening. If you're looking at a venture orphan and they've hired investment bankers. To help with the transaction. That's generally a sign, like something's weird. And we, I remember seeing that early on. They've, they hired,an attorney, like high end attorneys and an investment banking team to essentially put the sale, like a deal together.

And like, they kept asking us to fill out a worksheet that was like, tell us how you're going to pay the investment. Pay yourselves. I'm going to pay the attorneys. They're like, we're not like, it's, the, the, it's just not part of what we're doing. Maybe that. We could have glossed around that. And that's, I think, to your point of just getting right out, swallow the toad, just being like, Hey, you guys are, we're going to cut this team.

And. We're going to keep one of you around and we're going to give you incentives. But what I think, in our final conversation was like, we had the optionality, I think, to like torpedo the other deal. And so I think , this is where these things get a little, a little bit beyond where I think I was comfortable stepping in because if I was really comfortable about this business, I probably would have stuck it out.

But I think we had, we gave. to our equity holders, they could have blocked the sale. So they, between the equity and debt holders, they would have blocked this other sale because, And then they could have said, Hey, you got to go with the only thing that's going to give us a return. from a, a reputation perspective as VCs, that's maybe that's bad.

But, from our perspective, it also felt like we were just like, going to do what we said we weren't going to do in the beginning. We're not going to fuck up this other deal for you. And it felt very clear at the end that we were going to fuck up. The only way that we're going to get this done is they didn't want to work with us.

They didn't want to, and it was starting to get hostile where they're like, well, you're never going to figure out how to run this business. And then when we asked, like, I think you asked. Jack, you were like, how, if we fail, how are we going to, how do you think we're going to fail? And he was like, a year from now,

[00:15:28] Colin Keeley: why was it?

And then he was like, well, you guys don't know the business. And that was it. And then he's like, ah, actually I could probably teach you guys it over a couple hours. And it's like, ah, you'd probably be fine. It was very

[00:15:40] Brent Sanders: weird, but like, it was funny. Yeah.

[00:15:44] Colin Keeley: How did we actually lose it? So the founder basically was like, I mean, he kind of withheld information.

We didn't really know what the other obligations were and that made everyone else skittish. And we weren't willing to be the bad guy to like. Jeopardize his personally guaranteed stuff getting paid back. it was basically how it ended.

[00:16:06] Brent Sanders: Yeah, I think, I remember just, I didn't want to play that heart of ball.

That's I'm being, that's like the gut feeling. I feel like a bitch for saying that, but I didn't have enough confidence around this business. Like it felt like. I, it felt like we would be forcing something and we'd be forcing something and my gut was like, I would force it if it was like, if I knew it was a good deal, we had spent maybe another month with it and we had a little more of a footing, but it just felt like fucking some somebody else's like.

Life changing deal up just to, to get one more deal closed. And I, I, I'm a deal junkie. I think we both are. And like, I think it's, it's, it's good to know when you have a problem, right? It's like, it's, it's good to know when it's about that. I'm like, Hey, well, we started this, we got to close it. I'm not going to waste my time versus like, is this thing even going to be worth anything in six months?

Like we didn't really think that. That was gonna be the case. So could we have obfuscated our cuts? Yes. Could we have laid out a really pretty picture being like, Hey, you guys just come on board and, we'll figure it out and we're just going to pay everybody. And it's going to be, it's going to be great.

Like we're going to be in house with you. We could have made a pitch that would have. Made it seem like it's a way better offer. Maybe not way better, but at least like this is a real pitch where you retain more ownership because by the way, their ownership was going to zero too, but they were getting some sort of equity in the acquire or like RSUs, I would assume,like a typical acquirer.

So there was a pitch we made there that we kind of, we're too Midwestern, I guess, or too, just transparent and being like, this is what we're going to do. It's a VP of product for. a product that nobody uses, or it has less than a hundred users, right? So it's, it's, we're going to make the business for now, not for later for what the growth is.

So, yeah, there were a couple of things, but I know there was a point at the end there that we could have kept it going. We could have blocked, gotten the support to block or slow that other sale. But there were just too many things that were like, this doesn't sit right. Like this doesn't. And then at the very end, I'm like, do you, we even really want to do this?

Like this exact business. It was like, Do if we rested control from them, would we even have the expertise and knowledge? And it was just too many things that were like, nah, nah, you're not, you're not that close. And it was, it was just too distant. So, and I also got that sense from the sponsors that brought us in is that they, they love the idea of doing this and they love the idea of retaining their equity and they love the idea of us.

Putting it into a new direction. But I think at the end of the day, they also saw the writing on the wall. And I don't think there was an appetite or ability to put more resources to, to, to do it because it's, it's really, it's kind of good money after bad after a while. Yeah,

[00:18:50] Colin Keeley: it's sad. I mean, I think it's a good asset.

It's a good business. It's been mismanaged. And then there were just like obligation on top of obligation of like, these investment bankers, , an unknown amount, lawyers, kind of an unknown amount. I think maybe if we were brought in a couple weeks earlier and could have got more finalized numbers for those things, the deal would have made sense or wouldn't have, but at least we could be more concrete about it.

yeah, it was just kind of a bummer.

[00:19:17] Brent Sanders: Yeah, I guess that's the thing. If the important takeaway is like, we went through this, we've been through this a couple of times now, and we are going to continue to see these, the market sucks, right? The, the economy is, is tumultuous. The, the fundraising market is difficult for, underperforming companies.

So I guess that's the call to action here is like, send us more of these deals. We are very interested in doing them. We've already gone through this a handful of times. We haven't closed one of these, we've closed. Several others, but I really do think that there is something to this model. And I think that we should put a lot more energy into finding them.

It's just, my sense is it's all referral. It's all networking and this kind of stuff. It's all like, yeah, I'm on the board of this, or I'm an investor in that. like an Aqua hire, it almost felt like what they were doing should be legal to be fair. Like, I'm not saying they should bankrupt themselves.

Cause they definitely put a lot into it, but it like, I guess it's the part of venture capital. They know what they're getting into, but it also feels like almost wrong. In some respects. So

[00:20:18] Colin Keeley: I have, I like, I'm offended for the friends and family and the other investors. Like, I do think if you take money from people, like they worked hard during that money somehow.

and you do have a fiduciary responsibility to like treat that money well and get them a return best you can. So it is just wild. These people that bet on you super early, you're just screwing them over fully. not even trying to make them not whole, but like, the best you can, and they just got nothing.

it is, well, it seems like it's

[00:20:46] Brent Sanders: maybe not illegal. Yeah. I'm not, no, no attorney, but it's like, there, there is this idea of like the fiduciary responsibility. Like if you take people's money, I don't know if that's the case with, with venture capital. Obviously it's, I don't think it is right. Or that you were technically your fiduciary.

I think it's just, again, coming back to our, Midwestern roots. It, it feels wrong, but I also know like they're in a tight. Tough spot. I would have probably done the exact same things they did to be fair. Like after four or five years of running a business, putting hundreds of thousands of dollars of my own money into it.

And in having that debt ready to be called, it's like, yeah, I got to get out of this and I'm sorry, it didn't work out. But I mean, I understand it's, it's an incredibly difficult situation. So here's the question. Would you have run this process? Differently in the sense of like, let's present to them the most attractive offer and the most attractive, like bullshit just to get it done.

And then clean house. No,

[00:21:45] Colin Keeley: I would have been more open to keeping Jack and Jill. I guess I, the only real regret I had, I think we learned the business as quick as we possibly could have, it would have been better if you could have flown out there and met in person. I think we would have known more. I probably would have kept both founders and kept them certainly both more involved earlier on.

That was only like the footfall that we had. Everything else was just like, it was a time constraint that kind of screwed us. but I think you have to be clear that like, you can't keep the whole team. The reality is just the reality. I, I'm just not hiding

[00:22:18] Brent Sanders: that one. Yeah. It makes sense. So yeah, I guess that's, that's that one.

We wanted to share that as a sort of learning, but more so to, if you know of these types of deals or you're seeing these, this category of deal where it's still a great business, but it's not going to raise another round. This is our, our bread and butter now.

[00:22:40] Colin Keeley: Yeah, I think it should be. I mean, I think there's, I know a few smart folks going after it.

I don't think there's that many of them that are credibly looking to do it. yeah, I think we know now how to like craft a deal to win all the different shareholders over, the founders, you basically bribe them cash, pay out some equity, otherwise, A lot of these raise too much money, they're under a preference stack, their equity is worth nothing.

It's like a zombie ship or something that's just kind of cruising along. So I think you can make it worthwhile for the founders for sure. It's a recap. VCs, the smart ones, I think they know it's not the next Uber. They know it's a game of home runs. This gets them off the board, it frees them up, it closed out the fund, depending on if it's an old fund or something, and you give them a PR win, so you could say, hey, we sold this thing off, and so the rough way we structure it, which is complicated, is often like, your debt gets paid back or continues to roll on a new company, the existing shareholders, the VCs get crammed down, or zero if they want out, depending on the structure, founders get some equity, they get the bribes, Of cash payouts of sorts.

we buy the majority of equity and like bring in, more money for growth and that's yeah

[00:23:47] Brent Sanders: one one thing that I thought we Presented well for that was introducing vesting like uh, not coming in and saying hey, we're gonna take some chunk of it We would also vest right? I think that's important to keep in these deals.

I know it's not generous for us, but if we were to You know, in most cases, if we do, we're going to do and, at least repackage this and get it on track. Like we only put six months into it or something like that. I, I, I think, we'd want to accelerate it to a year or something, but assuming, for your best with one year cliff, but I do feel like something like that reintroducing vesting is also great because.

you just saw what happens when everyone busts and it just, pollutes the cap table. So there's just all these hunks of dead weight sitting around. Yeah.

[00:24:37] Colin Keeley: If you got an interesting business and you raised too much money and you're buried under a preference stack, come reach out to us.

We'll recap you and we'll partner with you on it. I think it could be very successful for everyone.

[00:24:49] Brent Sanders: Cool. And, what else has been going on? I mean, it's been, I got, I don't know when our last recording was, but it was probably three months ago. It's been a

[00:24:57] Colin Keeley: long time. I moved down to Austin and then I was basically traveling and obviously my podcast setup is not set up.

I could not find the cords I needed. So those are kind of the big things

I also went out to Canada. So when I Andrew Wilkinson put together a mastermind, so spent some time with the tiny team. yeah, that was interesting as well. Talk to more folks trying to do venture orphans or people that raised a series, a series B and they're selling off. They're basically venture orphans sitting on the other side.

Victoria is beautiful. Make it out there. If you ever can, it's like a 20 minute flight from Vancouver.

[00:25:31] Brent Sanders: Very cool. Very cool. Yeah. Hopefully it was, it was worthwhile, but all right, we're, we're going to start recording again, more frequently. We'll come up with more topics and, yeah, go from there.

[00:25:43] Colin Keeley: Sounds like a plan. Yeah. Hopefully have more venture orphan stories for you shortly here.

[00:25:49] Brent Sanders: Cool. Well, thanks for listening, everybody. All right. See ya.

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